Rachel Keeler spoke to participants at the second East African Community (EAC) investment conference about whether investors were still interested in infrastructure in East Africa and when the regional private sector can realistically expect improvements.
The second East African Community Investment Conference held in Nairobi at the end of July 2009 was typically ambitious in the sheer number of sectors and issues broached, but one bottleneck underlay much of the discussion. “In spite of the progress we have made, we are faced with a variety of challenges,” acknowledged Kenya’s President Mwai Kibaki in his opening speech. “These constraints are mainly in form of inadequate infrastructure including inadequate energy, roads, railways, ports and harbours, telecommunications, information and communication, and water.” In other words, all infrastructure desperately needs to be developed.
This is not a chicken-or-egg type of problem. Everyone recognizes that infrastructure must come first in Africa before anything else will work properly, grow quickly, or attract large amounts of foreign investment. Private and foreign investment in infrastructure across sub-Saharan Africa has been growing since the 1990s following continent-wide reforms and privatisations. The World Bank’s Private Participation in Infrastructure (PPI) data project shows that investment hitting a high of over USD12bn in 2006. Development finance institutions (DFIs) and donors have been instrumental in pushing projects forward over this period, but most of these partners are facing tight budgets following the global crisis, and the focus of the EAC conference was on how to bring in more private sector money.
Of course the immediate problem is that private capital is just as scarce these days. But the experts say in Africa liquidity remains second to concerns regarding deal structuring. Pricewaterhouse Coopers (PWC) recently released their Global Utilities Survey for 2009, which notes for Central, East and West Africa: “The more pressing constraints on capital come from within. Despite over a decade of experience since the African reform process began to unfold, project structuring is still not following a ‘cookie cutter’ approach – whereby standard processes and documents are used from policy setting down to procurement. This has driven up the complexity of transactions and, anecdotally, had a negative impact on the number of successful financial closings.” This observation was echoed by many EAC conference delegates working in the sector.
Sine Qua Non
As is so often the case, the EAC conference spent most of its time hashing out optimistically subjunctive solutions to these problems, e.g. the private sector says it is vital that governments cut out corruption; the committee recommends that EAC countries actually implement regional legislation, etc. As part of the conference panel on public private partnerships (PPPs) for infrastructure projects, Dr. Kevin Kariuki from Industrial Promotion Services (IPS) stressed how important it was that governments familiarise themselves with the various PPP options available. Policymakers, he said, need to know in which cases different deal types perform best, and how to properly structure them in order to attract private investment.
For example, the six PPP archetypes – what Kariuki calls status quo or commercialization without private involvement, management contracts, leases, concessions, build-own-operate/transfers (BOTs), and divestitures - all offer different mixtures of public and private commercial risk assumption, management responsibility, public good provision, and financial returns that need to be clarified up front. Kariuki says management contracts often fail because governments fail to lay out clear expectations and performance measures for their private partners. Vivienne Yeda Apopo, director general of the East African Development Bank (EADB), said to safeguard public interests governments must be clear about what guarantees and subsidies they would provide as well as contract termination provisions, and for risk sharing arrangements, require a framework for a public stake in upside returns. Governments often do not have the capacity to negotiate fair or highly technical contracts, so much focus is placed on the need to hire consultants to do this for them.
For the private sector, most investors want to see standardised contracts, clear and conducive legal and regulatory frameworks, and one-stop investment promotion authorities. Kariuki likes to say: “Investment capital follows the path of least resistance”, so the government’s basic job is to make things easy. Apopo added that governments can fund feasibility studies, which are costly for individual investors to do on spec, streamline procurement processes to cut out corruption, commit to harmonizing regional policies to create a larger, more attractive market, and create small bankable projects with a high chance of success to build investor confidence. Also on the PPP panel, Trans-Century’s Chairman David Gachao said private sector perceptions must be managed better - a theme that ran through the entire conference. Foreign investors need some hand-holding coming in, and the government needs to demonstrate that it is not working from a baseline of incompetence.
Show Me the Will
After sitting through about 45 minutes of these policy prescriptions, one perky member of the PPP forum audience stood up and said he wanted to know when he could expect to start seeing some results: “We have these conferences and we make recommendations, but we’re not working it at the top.” And from the murmur that spread through the crowd it was pretty obvious that most people in East Africa are still wondering when their governments will begin seriously implementing these great ideas to attract the investment that everyone wants.
In their utilities survey, PWC speculate that “firms in the Central, East and West African region have observed a step change in thinking about African power issues. Donors, governments, business and other stakeholders have started to work together to develop regulatory and other solutions to the many problems faced in the continent.” When asked after the PPP forum for his thoughts, Dr. Kariuki said he was optimistic about the amount of political peer pressure to get deals and regulations right that governments now face as members of the EAC. He also said any project that comes with DFI involvement will be above board, although he declined to comment on how much corruption persists in private deals. It was an open point made at the conference that Rwanda is the only EAC country yet to commit to the anti-corruption fight. And most countries have yet to secure much-needed technical capacity or offer standardised project development paths.
But Kariuki’s other favourite topic for discussion is Uganda’s successful Bujagali Hydropower Project, which he says was made possible by proactive support from the Ugandan government. Granted, Bujagali had a challenging past and comes with World Bank backing, which means stringent standards and technical guidance, but Kariuki says the Ugandan government sent flocks of ministry authorities to project meetings to make sure private investors could have all their questions answered and problems solved from various authorities on the spot. The USD800m deal was structured well and oversubscribed, and should solve many of Uganda’s power problems upon completion in 2011.
Karuiki cites other PPP success stories in the region: Kenya Airways went through a management contract and was successfully privatised by a government divestiture; PPP arrangements for Songas in Tanzania and Uganda Telecom have also been fairly smooth and productive. The region’s telecoms industry has generally provided generally fertile ground for BOTs. But of course there have been failed partnerships, such as Tanzania’s Dar es Salaam Water Supply and Sanitation Project (DAWASA) and the Kenya Power and Lighting Company (KPLC) management contract which was not renewed, which suggest a persistent inability by governments here to either identify optimal deals that balance private returns and public service provision well, or cut out corruption, or both
The EAC, considered one of the most active regional economic blocks in Africa, has succeeded in creating a bigger market. This will drive investor interest by opening up opportunities for larger infrastructure projects to serve the entire region. But the community has yet to fully harmonise its fiscal, tax and legal frameworks, and overall implementation of promised region-wide legislation has been slow. However, there is hope for cross-border infrastructure projects such as the Dar es Salaam-Mombasa gas pipeline meant to pump natural gas from Tanzania to Kenya. A feasibility study for the line was recently approved for finance by the African Development Bank. The Bujagali project also hopes to transfer energy from Uganda into Kenya, Tanzania, Rwanda, and possibly the DRC and Sudan, although it remains unclear whether this will be feasible in the near term.
Show Me the Money
The good news is that demand is solid, with a seriously capital ‘S’. There is absolutely no shortage of demand for infrastructure in the region. Investors seeking long-term infrastructure projects like solid demand, so the logic is that they should like East Africa. But if you demand it, even if you will it, regulate and structure it, will they come? The global financial crisis has made this a difficult question to answer.
The bad news is that while the EAC investment conference, the second of its kind, was well attended, the crowd was rather short on new faces. Bidco CEO Vimal Shah began his presentation on the EAC as a profitable investment area by asking anyone who was considering investing in the region but had not yet done so to raise their hands – he counted only three. Overall, a small group of Canadians, a few people from Dubai and several others from China made up the bulk of the foreign investors in attendance. PWC are more optimistic: “While some traditional sponsors may withdraw from developing countries,” their utilities survey says, “investors and sovereign funds from Asia and the Middle East are becoming increasingly active.” This is certainly the case for countries like Qatar, which have no shortage of cash and are keenly eyeing infrastructure projects such as the proposed Lamu port development in Kenya.
Trans-Century’s Gachao says bluntly that the East African reality today is a market overflowing with potential but also laden with inefficiencies that derail productivity and repel many investors. His answer: “A lot of the time we look too far outside for solutions, but the truth is a lot of the answers lie within, a lot of the capacity lies within, and I would even say a lot of the capital is here.” Trans-Century, a Kenyan-based private equity firm, plans to put much of its own capital into transport and power projects over the next 10 years. “We will do whatever it takes to make sure these investments work,” says Gachao. But the firm only has about USD150m in funds raised now, and Gachao is quick to say that the kind of development East Africa needs cannot be done without foreign investment. Gachao also notes that he has seen a lot more interest in the region from foreign investors over the last two years, since the global crisis started shredding solid demand and investment opportunities in other parts of the world. Actis, a global private equity firm investing in emerging markets, is actively seeking infrastructure deals in East Africa, and already has money in successful PPP projects such as Grain Bulk Handlers in Mombasa. Actis says infrastructure in sub-Saharan Africa is particularly attractive to large-scale equity investors who are increasingly less adverse to the risks posed.
Kariuki says IPS is interested in any infrastructure deal in the region that is structured correctly, and that the World Bank, European Investment Bank, and other DFIs remain committed to providing liquidity for the sector. One of the grand plans presented at the conference was to establish an EAC infrastructure fund, much like the one already raised in Kenya. But to do this, the EAC must first harmonise its capital markets, a move which has been resisted by Tanzania. A regional fund also presents various technical challenges, as a new institution would be required, and governance issues would have to be further addressed; hence the focus on public private partnerships for development in the medium term.
One persistent problem for private investors, especially those with conservative post-global-crisis risk assessments, is that the general rule of unforeseen costs still dominates attempts to do business in Africa. PwC’s survey respondents all complain of having to stockpile replacement parts and supplies because of inefficient and unpredictable procurement processes here. Uganda’s Independent magazine reported in March that the distribution portion of the Bujagali project, to be completed next year, has run into problems with land owners demanding compensation meant to be financed by the Ugandan government. The owners have been reportedly obstructing excavation and construction. This problem delves into the swamp of Ugandan land law (which apparently contradicts those stringent World Bank standards), and characterises a general fear for investors looking at infrastructure here. Projects are worthless without a guaranteed distribution network, which as demonstrated in the Ugandan case, can get dicey even with government-backed purchase agreements. The Turkana Wind power project in northern Kenya also does not yet have a connection to the national grid.
Increasing emphasis has thus been placed on investment insurance. The recommended option is provided by the World Bank through its Multilateral Investment Guarantee Agency (MIGA). MIGA has provided guarantees against war, civil disturbance, breach of contract, expropriation, and transfer restriction for East African infrastructure projects in power and telecoms. The African Trade Insurance Agency (ATI) also offers similar coverage. Expropriation is not much of a concern in the region, but insurance will be encouraging to investors looking at decades-long investments in countries like Kenya and Burundi where civil disturbance is a past and potential reality. However, concerns that are much harder to insure against regarding corruption and lack of technical capacity or will for standardised deal structuring will most likely determine private interest in infrastructure development for East Africa.
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